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Is the Cyprus bailout doomed already?

By Nikos Chrysoloras

The board of the European Stability Mechanism is due to convene via teleconference within the next few days in order to formally approve the Cypriot bailout, opening the way for the disbursement of the first tranche from the 10-billion-euro emergency loan package backed by the EU and the IMF. But is the new deal doomed to fail? Kathimerini discussed the issue with several economic analysts who have been following the case closely. They all seem to agree that the troika’s projections regarding the Cypriot recession are optimistic. The emergence of a funding gap, a second bailout and some form of Cypriot debt restructuring, are almost unavoidable, they claim.

Raoul Ruparel, head of economic research at Open Europe:
“The Troika estimates for the length and depth of the Cypriot recession continue to seem overly optimistic. GDP is likely to contract by at least 15% over the next two years while returning to growth will take some time. The longer the capital controls are in place and the deeper the losses under the bank restructuring the worse this picture will get. The estimates also rely heavily on export led growth – with the rest of the Eurozone likely to slip back into recession and the euro being significantly overvalued for Cyprus this is far from guaranteed. The Cypriot economy needs to rebalance away from financial services and related industries – following the large depositor losses there is no hope for growth driven by these industries. However, the alternative drivers of growth are few and far between for Cyprus. Tourism is one, but Cyprus will require steep cuts in costs and prices to become competitive with other Eurozone countries in this area. The hope of a gas driven boom also seems unlikely to materialize, at least until the end of the decade. One of the few positives to come out of the deal was the hope that Cypriot debt would be put on a sustainable path due to the large contribution of bail-ins. However, the additional financing gap, which has opened up suggests that this is unlikely to be the case. This raises the prospect of further financial assistance being needed but also some form of further debt restructuring, which will prove very tricky to implement."

Megan Greene, chief economist at Maverick Intelligence:
“The underlying growth assumptions for the Cypriot bailout this year are hugely overly optimistic. Senior members of the ministry of finance in Cyprus admitted to me that they'd be quite pleased if the Cypriot economy only contracted by around 9% this year. With GDP falling more sharply than expected, Cyprus will fall behind on its fiscal targets, and as it implements ever more austerity measures to play catch up, will go deeper into depression. This bailout program ensures Cyprus will either need a second bailout or a debt restructuring in a year or two, with the latter more likely”.

Stephanie Hare, senior analyst for Western Europe at Oxford Analytica:
“The viability of the latest Cypriot rescue is highly questionable: forecasts of a deep recession this year (nearly 9.0%) and in 2014 (nearly 4.0%) may prove optimistic, while the projection that Cyprus will return to growth thereafter is patently ridiculous. Other euro-area bailout recipients remain enmired in debt, high unemployment and recession -- one reason why EU leaders agreed last week to grant Ireland and Portugal an extra 7 years to pay back their bailout loans. Efforts by the EU/ECB/IMF 'troika' to be positive are requiring ever-increasing contortion, including the tolerance of fiscal slippage, extended loan maturities, and debt write-offs. Risks remain high (Portugal could still require further assistance and Slovenia remains vulnerable) while the lack of growth throughout the region augers poorly for its long-term prospects.”

ekathimerini.com , Sunday April 21, 2013 (17:56)  
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